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3. Managing Your Business
This section offers guidance in starting a business. But you are not ready to start your own business until you have given some thought to managing it. A business is an ongoing activity that doesn’t run itself. As the manager you will have to set goals, determine how to reach those goals and make all the necessary decisions. You will have to purchase or make your product, price it, advertise it and sell it. You will have to keep records, and determine costs. You will have to control inventory, make the right buying decisions and keep costs down. You will have to hire, train and motivate employees now or as you grow.
Good management is the key to success and good management starts with setting goals. Set goals for yourself for the accomplishment of the many tasks necessary in starting and managing your business successfully. Be specific. Write down the goals in measurable terms of performance. Break major goals down into sub-goals, showing what you expect to achieve in the next two to three months, the next six months, the next year, and the next five years. Beside each goal and sub-goal place a specific date showing when it is to be achieved.
Plan the action you must take to attain the goals. While the effort required to reach each sub-goal should be great enough to challenge you, it should not be so great or unreasonable as to discourage you. Do not plan to reach too many goals all at one time. Establish priorities.
Plan in advance how to measure results so you can know exactly how well you are doing. This is what is meant by “measurable” goals. If you can’t keep score as you go along you are likely to lose motivation. Re-work your plan of action to allow for obstacles which may stand in your way. Try to foresee obstacles and plan ways to avert or minimize them.
Skillful buying is an important essential of profitable operation. This is true whether you are a wholesaler or retailer of merchandise, a manufacturer or a service business operator. Some retailers say it is the most important single factor. Merchandise which is carefully purchased is easy to sell.
Determining what to buy means finding out the type, kind, quality, brand, size, color, style -whatever applies to your particular inventory – which will sell the best. This requires close attention to salespeople, trade journals, catalogs, and especially the likes and dislikes of your regular customers. Analyze your sales records. Even the manufacturer should view the problem through the eyes of customers before deciding what materials, parts, and supplies to purchase.
Know your regular customers, and make a good evaluation of the people you hope will become your customers. In what socioeconomic category are they? Are they homeowners or renters? Are they looking for price, style or quality? What is the predominant age category?
The age of your customers can be a prime consideration in establishing a purchasing pattern. Young people buy more frequently than most older people. They need more, have fewer responsibilities, and spend more on themselves. They are more conscious of style trends whether in wearing apparel, cars or electronic equipment. If you decide to cater to the young trade because they seem dominate in your area, your buying pattern will be completely different than if the more conservative middle-aged customers appear to be in the majority.
Study trade journals, websites, newspaper advertisements, catalogs, window displays of businesses similar to yours. Ask advice of salespeople offering you merchandise, but buy sparingly from several suppliers rather than one, testing the water, so to speak, until you know what your best products will be.
Locating suitable merchandise sources is not easy. You may buy directly from manufacturers or producers, from wholesalers, distributors or jobbers. Select the suppliers who sell what you need and can deliver it when you need it. (Distributors and jobbers are used by most business people for quick fill-ins between factory shipments.)
You may spread purchases among many suppliers to gain more favorable prices and promotional material. Or you may concentrate your purchases among a small number of suppliers to simplify your credit problems. This will also help you become known as the seller of a certain brand or line of merchandise, and to maintain a fixed standard in your products, if you are buying materials for manufacturing purposes.
When to buy is important if your business will have seasonal variations in sales volume. More stock will be needed prior to the seasonal upturn in sales volume. As sales decline, less merchandise is needed. This means purchases of goods for resale and materials for processing should vary accordingly.
At the outset, how much to buy is speculative. The best policy is to be frugal until you have had enough experience to judge your needs. On the other hand, you cannot sell merchandise if you do not have it.
To help solve buying problems, you should begin to keep stock control records at once. This will help you keep the stock in balance – neither too large nor too small – with a proper proportion and adequate assortment of products, sizes, colors, styles and qualities.
Fundamentally, there are two types of stock control – control in dollars and control in physical units. Dollar controls show the amount of money invested in each merchandise category. Unit controls indicate the number of individual items when and from whom purchased by category. A good stock control system can help you determine what, from whom, when, and how much to buy.
Much of your success in business will depend on how you price your services. If your prices are too low, you will not cover expenses; too high and you will lose sales volume. In both cases, you will not make a profit.
Before opening your business you must decide upon the general price level you expect to maintain. Will you cater to people buying in the high, medium, or low price range? Your choice of location, appearance of your establishment, quality of goods handled, and services to be offered will all depend on the customers you hope to attract, and so will your prices.
After establishing this general price level, you are ready to price individual items. In general, the price of an item must cover the cost of the item, all other costs, plus a profit. Thus, you will have to markup the item by a certain amount to cover costs and earn a profit. In a business that sells few items, total costs can easily be allocated to each item and a markup quickly determined. With a variety of items, allocating costs and determining markup may require an accountant. In retail operations, goods are often marked up by 50 to 100 percent or more just to earn a 5% to 10% profit!
Let us work through a markup example. Suppose your company sells one product, Product A. The supplier sells Product A to you for $5.00 each. You and your accountant determine the costs entailed in selling Product A are $4.00 per item, and you want a $1 per item profit. What is your markup? Well, the selling price is: $5 plus $4 plus $1 or $10; the markup therefore is $5. As a percentage, it is 100% ($5 markup = $5 cost of the item). So you have to markup Product A by 100% to make a 10% profit!
Many small firms are interested in knowing what industry markup norms are for various products. Wholesalers, distributors, trade associations and business research companies publish a huge variety of such ratios and business statistics. They are useful as guidelines. Another ratio (in addition to the markup percentage) important to small firms is the Gross Margin Percentage (GMP).
The GMP is similar to your markup percentage but whereas markup refers to the percent above the cost to you of each item that you must set the selling price in order to cover all other costs and earn profits, the GMP shows the relationship between sales revenues minus the cost of the item, which is your gross margin, and your sales revenues. What the GMP is telling you is that your markup bears a certain relationship to your sales revenues. The markup percentage and the GMP are essentially the same formula, with the markup referring to individual item pricing and GMP referring to the item prices times the number of items sold (volume).
Perhaps an example will clarify the point. Your firm sells Product Z. It costs you $.70 each and you decide to sell it for $1 each to cover costs and profit. Your markup is 43%. Now let up say you sold 10,000 Product Z’s Iast month thus producing $10,000 in revenues. Your cost to purchase Product Z was $7000; your gross margin was $3,000 (revenues minus cost of goods sold). This is also your gross markup for the month’s volume. Your GMP would be 30% . Both of these percentages use the same basic numbers, differing only in division. Both are used to establish a pricing system. And both are published and can be used as guidelines for small firms starting out. Often managers determine what Gross Margin Percentage they will need to earn a profit and simply go to a published Markup Table to find the percentage markup that correlates with that margin requirement.
While this discussion of pricing may appear, in some respects, to be directed only to the pricing of retail merchandise it can be applied to other types of businesses as well. For services the markup must cover selling and administrative costs in addition to the direct cost of performing a particular service. If you are manufacturing a product, the costs of direct labor, materials and supplies, parts purchased from other concerns, special tools and equipment, plant overhead, selling and administrative expenses must be carefully estimated. To compute a cost per unit requires an estimate of the number of units you plan to produce. Before your factory becomes too large it would be wise to consult an accountant about a cost accounting system.
Not all items are marked up by the average markup. Luxury articles will take more, staples less. For instance, increased sales volume from a lower-than-average markup on a certain item – a “loss leader” – may bring a higher gross profit unless the price is lowered too much. Then the resulting increase in sales will not raise the total gross profit enough to compensate for the low price.
Sometimes you may wish to sell a certain item or service at a lower markup in order to increase store traffic with the hope of increasing sales of regularly priced merchandise or generating a large number of new service contracts. Competitors’ prices will also govern your prices. You cannot sell a product if your competitor is greatly underselling you. These and other reasons may cause you to vary your markup among items and services. There is no magic formula that will work on every product or every service all of the time. But you should keep in mind the overall average markup which you need to make a profit.
Whether you operate a factory, wholesale outlet, retail store, service shop, or are a contractor, you will have to sell. No matter how good your product is, no matter what consumers think of it, you must sell to survive.
Direct selling methods are through personal sales efforts, advertising and, for many businesses, display – including the packaging and styling of the product itself – in windows, in the establishment, or both. Establishing a good reputation with the general public through courtesy and special services is an indirect method of selling. While the latter should never be neglected, this brief discussion will be confined to direct selling methods.
To establish your business on a firm footing requires a great deal of aggressive personal selling. You may have established competition to overcome. Or, if your idea is new with little or no competition, you have the extra problem of convincing people of the value of the new idea. Personal selling work is almost always necessary to accomplish this. If you are not a good salesperson, seek an employee or associate who is.
A second way to build sales is by advertising. This may be done through newspapers, shopping papers, the yellow pages section of the telephone directory, and other published periodicals; radio and television; handbills, and direct mail. The media you select, as well as the message and style of presentation, will depend upon the particular customers you wish to reach. Plan and prepare advertising carefully, or it will be ineffective. Most media will be able to describe the characteristics of their audience (readers, listeners, etc.). Since your initial planning described the characteristics of your potential customers, you want to match these characteristics with the media audience. If you are selling expensive jewelry, don’t advertise in high school newspapers. If you repair bicycles, you probably should.
Advertising can be very expensive. It is wise to place a limit upon an amount to spend, then stay within that limit. To help you in determining how much to spend, study the operating ratios of similar businesses. Media advertising salespeople will help you plan and even prepare advertisements for you. Be sure to tell them your budget limitations.
A third method of stimulating sales is effective displays both in your place of business and outside it. If you have had no previous experience in display work, you will want to study the subject or turn the task over to someone else. Observe displays of other businesses and read books, trade magazines, and the literature supplied by equipment manufacturers. It may be wise to hire a display expert for your opening display and special events, or you may obtain the services of one on a part-time basis. Much depends on your type of business and what it requires.
The proper amount and types of selling effort to use vary from business to business and from owner to owner. Some businesses prosper with low-key sales efforts. Others, like the used-car lots, thrive on aggressive, hoop-la promotions. In any event, the importance of effective selling cannot be over-emphasized.
On the other hand, don’t lose sight of your major objective – to make a profit. Anyone can produce a large sales volume selling dollar bills for ninety cents. But that won’t last long. So keep control of your costs, and price your product carefully.
The importance keeping of adequate records cannot be stressed too much. Study after study shows that many failures can be attributed to inadequate records or the owner’s failure to use what information was available to him. Without records, the businessperson cannot see in advance which way the business is going. Up-to-date records may forecast impending disaster, forewarning you to take steps to avoid it. While extra work is required to keep an adequate set of records, you will be more than repaid for the effort and expense.
If you are not prepared to keep adequate records – or have someone keep them for you – you should not try to operate a small business. At a minimum, records are needed to substantiate:
Your returns under tax laws, including income tax and social security laws;
Your request for credit from equipment manufacturers or a loan from a bank;
Your claims about the business, should you wish to sell it.
But most important, you need them to run your business successfully and to increase your profits. With an adequate. yet simple, bookkeeping system you can answer such questions as:
How much business am I doing?
What are my expenses? Which appear to be too high? What is my gross profit margin? My net profit?
How much am I collecting on my charge business?
What is the condition of my working capital?
How much cash do I have on hand? How much in the bank? How much do I owe my suppliers?
What is my net worth? That is, what is the value of my ownership of the business?
What are the trends in my receipts, expenses, profits, and net worth? Is my financial position improving or growing worse? How do my assets compare with what I owe?
What is the percentage of return on my investment?
How many cents out of each dollar of sales are net profit?
Answer these and other questions by preparing and studying balance sheets and profit-and-loss statements. To do this, it is important that you record information about transactions as they occur. Keep this data in a detailed and orderly fashion and you will be able to answer the above questions. You will also have the answers to such other vital questions about your business as: What products or services do my customers like best? Next best? Not at all? Do I carry the merchandise most often requested? Am I qualified to render the services they demand most? How many of my charge customers are slow payers? Shall I switch to cash only, or use a credit card charge plan?
The kind of records and how many you need depends on your particular operation. A boy selling newspapers part time each day does not need inventory records. He buys and sells his entire stock each day. But shoe store or dress shop operators will soon find they cannot keep necessary inventory information in their heads.
Below is a list of records, grouped according to their use. No business will need them all. You may need only a few. As a matter of fact, you should not maintain a record without answering these three questions: (1) How will this record be used? (2) How important is the information likely to be? (3) Is the information available elsewhere in an equally accessible form?
The following list may call your attention to records you can use to great advantage:
Inventory and Purchasing Records provide facts to help with buying and selling
Inventory Control Record
Item Perpetual Inventory Record
Model Stock Plan
Purchase Order File
Open To Purchase Order File
Returned Goods File
Price Change Book
Accounts Payable Ledger
Sales Records to help determine sales trends
Individual Sales Transactions
Summary of Daily Sales
Sales Promotion Plan
Cash Records to show what is happening to cash.
Daily Cash Reconciliation
Cash Receipts Journal
Cash Disbursements Journal
Credit Records show who owes you money and whether they are paying on time.
Charge Account Application
Accounts Receivable Ledger
Accounts Receivable Aging List
Employee Records show legally required information and information helpful in the efficient management of personnel.
Employee Earnings and Amounts Withheld
Employees’ Expense Allowances
Record of Changes in Rate of Pay
Record of Reasons for Termination of Employment Employee Benefits Record
Crucial Incidents Record
Fixtures and Property Records list facts needed for taking depreciation allowances and for insurance coverage and claims.
Bookkeeping Records, in addition to some of the above, are needed if you use a double-entry bookkeeping system.
For efficient business operation, use information from records to keep inventory stock in line with sales, to watch trends, and for tax purposes. Use records to plan. A well thought-out business plan as a guide will strengthen your chances for success.
A record showing the data for your business plan is the budget. Work up a budget to help you determine just how much increase in profit is reasonably within your reach. The budget will answer such questions as: What sales will be needed to achieve my desired profit? What fixed expenses will be necessary to support these sales? What variable expenses will be incurred? A budget enables you to set a goal and determine what to do in order to reach it.
Compare your budget periodically with actual operations figures. With effective records you can do this. Then, where discrepancies show up you can take corrective action before it is too late. The right decisions for the right corrective action will depend upon your knowledge of management techniques in buying, pricing, selling, selecting a nd training personnel, and handling other management problems.
You probably are thinking you can hire a bookkeeper or an accountant to handle the record keeping for you. Yes, you can. But remember two very important facts:
Provide the accountant with accurate input. If you buy something and don’t record the amount in your business checkbook, the accountant can’t enter it. If you sell something for cash and don’t record it, the accountant won’t know about it. The records the accountant prepares will be no better than the information you provide.
Use the records to make decisions. If you went to a physician and he told you you were ill and needed certain medicine to get well, you would follow his advice. If you pay an accountant and he tells you your sales are down this year, don’t hide your head in the sand and pretend the problem will go away. It won’t.
If your business will be large enough to require outside help, an important responsibility will be the selection and training of one or more employees. You may start out with family members or business partners to help you. But if the business grows – as you hope it will – the time will come when you must select and train personnel.
Careful choice of personnel is essential. To select the right employees determine beforehand what you want each one to do.
Then look for applicants to fill these particular needs. In a small business you will need flexible employees who can shift from task to task as required. Include this in the description of the jobs you wish to fill. At the same time, look ahead and plan your hiring to assure an organization of individuals capable of performing every essential function. In a retail store, a salesperson may also do stockkeeping or bookkeeping at the outset, but as the business grows you will need sales people, stockkeepers and bookkeepers.
Once the job descriptions are written, line up applicants from whom to make a selection. Do not be swayed by customers who may suggest relatives. If the applicant does not succeed, you may lose a customer as well as an employee.
Some sources of possible new employees are:
Recommendations by friends, business acquaintances.
Placement bureaus of high schools, business schools, and colleges.
Trade and industrial associations.
Help-wanted ads in local newspapers.
Your next task is to screen want ad responses and/or application forms sent by employment agencies. Some applicants will be eliminated sight unseen. For each of the others, the application form or letter will serve as a basis for the interview which should be conducted in private. Put the applicant at ease by describing your business in general and the job in particular. Once you have done this, encourage the applicant to talk. Selecting the right person is extremely important. Ask your questions carefully to find out everything about the applicant that is pertinent to the job.
References are a must, and should be checked before making a final decision. Check through a personal visit or a phone call directly to the applicant’s immediate former supervisor, if possible. Verify that the information given you is correct. Consider, with judgment, any negative comments you hear and what is not said.
Checking references can bring to light significant information which may save you money and future inconvenience.
A well-selected employee is only a potential asset to your business. Whether or not he or she becomes a real asset depends upon your training. Remember:
To allow sufficient time for training.
Not to expect too much from the trainee in too short a time.
To let the employee learn by performing under actual working conditions, with close supervision.
To follow up on your training.
Check the employee’s performance after he or she has been at work for a time. Re-explain key points and short cuts; bring the employee up to date on new developments and encourage questions. Training is a continuous process which becomes constructive supervision.
Supervision is the third essential of personnel control. Good supervision will reduce the cost of operating your business by cutting down on the number of employee errors. If errors are corrected early, employees will get more satisfaction from their jobs and perform better.
Small businesses sometimes face special problems in motivating employees. In a large company, a good employee can see an opportunity to advance into management. In a small company, you are the management. One thing you may wish to consider is to give good employees a small share of the profits, either through partownership or a profit-sharing plan. Someone who has a “share of the action” is going to be more concerned about helping to make a success of the business.